Libor Scandal - $800 Trillion!!
Barclays Bank admitted that it rigged the London InterBank Offered Rate from 2007 through 2009 to show that they could borrow money at a lower rate than they actually could.
Why did they do this? To make themselves look like they were financially better than they actually were, because if a bank can borrow money at a low rate, it means that other banks feel that that bank is a safe investment. In actuality, it wasn’t really as safe, because Barclays actually had to borrow money at a higher rate than they reported.
How did they do it?
Well, LIBOR is calculated by two guys in London that certain banks call with their rates. These guys then average out the rates and set the overall rate based on those calls. What this means though is that Barclays was not the only bank lying about their rates, other banks were also involved.
Why does this rate matter?
Because LIBOR is used to determine the rates of things such as credit cards and mortgages.. over 800 TRILLION DOLLARS worth, which is 12 times the TOTAL GDP of the world! So a little fib here and there can actually cause a slight change in rates on $800 trillion dollars worth of things.. the total dollar amounts can be staggering.
The problem with this whole story is that Barclays (and other banks) primarily reported their rates lower than they actually were, so the result was that people’s credit card rates or mortgage rates may have come out a little lower than they should have.. which on the surface seems like a GOOD thing for us, right?
But, in actuality, by keeping rates artificially low, these banks were making the market look healthier than it actually was and we know what ultimately happens to markets that are artificially propped up.. they ultimately come tumbling down, which is what we are seeing happen to some very large banks right now throughout Europe.
And when banks fail, or need bailing out by governments, who usually foots the bill? Oh yeah… us, the taxpayers.